Overview

This is not a Covid-19 or a work-from-home investment idea, and I do not anticipate a quick or meaningful recovery in the global crane industry by the end of 2020.  The reason to consider Manitowoc (MTW) as an investment is because of the risk-reward opportunity reflected in its current share price.  There is no doubt that MTW’s fiscal Q2 & Q3 will be disappointing at best, as many of its manufacturing operations have only just recently restarted and customers have been pushing out their orders into late 2020 and early 2021.  Being primarily a fixed cost business, volume and manufacturing utilization truly matter. But for the patient investor, Manitowoc’s recently restructured balance sheet along with its reduced capital expenditures and working capital needs will help it weather the current economic storm, as its management continues to find more ways to pare down its costs, leverage its operations, and be profitable at lower revenue levels.  An additional reason to consider Manitowoc is that it is an inexpensive way to invest in the anticipated global infrastructure spend.

Industry

The global crane industry generates approximately $40 billion in yearly revenue.  The segments that Manitowoc focuses on (tower, mobile, crawler cranes, and lifts) is estimated to be responsible for $12.5 billion of that revenue, growing at 6% CAGR in developed countries (US & Europe) and 8-10% in developing segments (Middle East, Africa and Asia).

Most cranes are purchased by equipment service companies, who in-turn lease out their heavy construction and industrial equipment on a daily, weekly, monthly, or yearly basis.  These companies are always performing a delicate balancing act to adjust their crane inventory to match their customer’s demand; too little crane inventory and they are missing out of revenue opportunities and too much inventory and their cranes sit idle, costing the company money.  In addition, equipment service companies are always looking to augment their inventory with more productive cranes that can be quickly set up/torn down, achieve greater heights, lift heavier weights, and navigate work sites at faster speeds.  Even though a crane has a twenty-year useful life span (tower cranes topping out at fifteen), equipment service companies risk losing business if they do not have a portfolio of newer and innovative cranes to offset their maturing inventory.  The newer cranes allow the equipment companies to charge a higher spot rate, making them both more productive and profitable.  Like the automotive industry, crane purchases are highly influenced by interest rates, the ability to finance purchases, and the strength of the used crane market.  Unlike the automotive industry, the overall economy plays a much more significant role in current and future crane demand.  In general, large equipment service companies tend to hold their cranes, on average, for 8-12 years.  After 9 years, a crane that has racked up a high number of working hours in the field will require higher levels of maintenance to replace worn parts and address metal fatigue just to keep in good working condition.

The crane industry’s end markets tend to be very cyclical (boom/bust) and sensitive to economic growth.  In the past, these global end market’s peaks and troughs tended to partially offset one another providing some stability for future demand.  Since the global financial crisis of 2008/2009, most of the global end markets have been negatively impacted and slow to recover.  Oil and gas companies have reduced their capital expenditures used to maintain and expand their drilling fields due to sub $60/barrel oil.  Residential and corporate real estate construction came to an abrupt halt after the financial crisis and only recently had begun to show signs of consistent renewed growth.  In 2019, during the trade war that developed between the US and China, China put a tax on imported US products, while the US placed tariffs on Chinese steel.  Steel is the largest raw material component in crane manufacturing.  Higher steel prices lead to higher manufacturing costs and lower margins for US companies.  In March of 2020, things got even more challenging when the outbreak of the Coronavirus caused the global economy to shut down, causing crane demand, supply chains, and manufacturing to be disrupted.  

In the aftermath of the Covid pandemic, governments across the globe are actively addressing infrastructure projects as a means to jump-start their respective economies.  The EU and countries like the UK are already formulating plans to invest hundreds of billions of dollars to upgrade and roads, bridges, rails, airports, schools, and hospitals.  These projects are expected to be funded and paid out over a 5-year period.  On July 1st, the US House of Representatives passed a $1.5 trillion infrastructure package which was independent of the $1-2 trillion plan floated by presidential nominee Joe Biden.  The Trump administration is also said to be considering extending and increasing the funding for the FAST Act law (expires September 30th) for 10 more years as it would be part of the administration’s $1 trillion infrastructure package.  Every presidential candidate/politician promises to support infrastructure spending, but very often those promises are abandoned because of the partisanship around government spending projects.  Given that governments are looking for ways to funnel money into their economies, I would expect to see a higher level of infrastructure spending bills enacted and projects quickly greenlighted.

Manitowoc (MTW)

Manitowoc is a leading global crane designer, manufacturer, and distributor with a broad and growing portfolio of tower, mobile, crawler cranes, and lifts.  The company has manufacturing, distribution, and service operations in over 20 countries, generating approximately half of its revenue from international sales.  Its products are used worldwide by public, private, and government entities to service the petrochemical, infrastructure, power/utilities, and commercial/residential real estate industries.  

Once a profitably run crane manufacturer, Manitowoc revenues and margins began suffering from years of underinvestment, neglect, and operational inefficiencies.  In March of 2016, Manitowoc decided to “unlock” the value of its food service business by spinning-off Manitowoc Foodservice/Welbilt (WBT) which, at the time, represented approximately 75% of the company’s total market capitalization and contributed most of the profits.  Prior to the spin-off, Barry Pennypacker was brought in to realign the crane segment and become the CEO of Manitowoc Cranes, bringing with him over 20 years of manufacturing experience as the CEO of Gardner Denver, and other high-level positions at Wabtec, Westinghouse, Stanley Works and Danaher Corp.  Pennypacker’s goal was to expand MTW’s revenue & margins by improving product innovation, streamlining operations, reducing material costs and waste, lowering working capital needs, and improving manufacturing agility and productivity.  

Thesis

Manitowoc is a much stronger company today than when it was separated from its foodservice business.  The money spent to improve innovation and productivity combined with the ongoing weakness of its end markets has masked the company’s true earnings power.  Over the past four years, management has “leaned” out the business by reducing its manufacturing footprint and staffing needs, increasing operational efficiency and agility, while improving its crane’s capability and reliability.  With 145,000 cranes operating in the field, Manitowoc’s aftermarket segment promises to play a more meaningful role with a recurring and growing revenue stream.

Innovation and Operational Efficiency

Before Pennypacker’s arrival, Manitowoc’s brand had eroded.  It was slow to innovate, had trouble meeting production schedules, and would often sell cranes it knew to have manufacturing defects that would need to be fixed in the field at an additional cost.  Since Pennypacker took the helm, the crane manufacturer has made steady progress at innovation, time to market, and operational efficiencies.  

Innovation is a big part of a crane’s brand.  It is not just about digitizing the crane control system (CCS) to make it more intuitive and user friendly.  Innovation starts by designing and engineering cranes to meet customer demands for lifting heavier loads and achieving greater heights at faster work speeds, all while keeping the overall gross vehicle weight within the on-road requirements (especially for mobile cranes).  

Up until 2017, Manitowoc was trailing its competitors in the truck-mounted crane segment because it did not have a crane that could lift over 80 USt and achieve heights beyond 230 feet.  Past design attempts fell short because the overall truck’s gross vehicle weight was too heavy to meet on-road requirements.  Starting in 2016, Manitowoc engineers redoubled their efforts and were able to design a truck-mounted crane that could lift 115 USt while hitting heights of 260 feet.  What made this truck mounted crane even more impressive was the crane went from concept to prototype in 6 months, which, in the past, would have taken the company 2-3 years to achieve.

The final innovation that customers were requesting from Manitowoc was to reduce the setup, calibration, and tear downtimes of its cranes.  Manitowoc’s latest crane models have reduced their calibration time to 15 minutes vs. 1 hour, while embedded in its lattice-boom crawler’s design is its ability to be set up and taken down in less than 2 hours vs. its older models which took up to 4.5 hours.  In total, Manitowoc has introduced over 60 new products since it became a stand-alone company in 2016.  These product releases were especially important to fill the gaps in the company’s crane portfolio as well as reassure their customers that the company is working hard to earn their trust, future business, and rebuild their brand.

Designing innovative products is an important first step but being able to manufacture these new products profitably brings a whole new set of challenges.  In 2017, MTW relocated its crawler manufacturing from Manitowoc, Wisconsin to its plant in Shady Grove, Pennsylvania.  The move to Shady Grove was part of Pennypacker’s lean initiative to streamline the company’s manufacturing operation, reduce fixed and working costs, and improve margins and quality.  All of Manitowoc’s manufacturing facilities have been redesigned to focus on lean manufacturing to improve productivity and reduce waste, while having the ability to ramp up production quickly, without excess capital, when market demand changes.

Over the past 4 years, Manitowoc has reduced it manufacturing footprint from 5.7 million square feet down to 4.2 million square feet, improving its revenue/square foot from $282 in 2016 to $436 by the end of 2019, while downsizing its staffing needs by approximately 1500 employees.  But management is not done.  The company is still focused on investing in productivity, eliminating waste, and cutting costs wherever possible, especially in European operations.  These lean initiatives have had a significant positive impact on the delivery rate and quality of cranes being produced.  Manitowoc has been able to reduce its order to delivery cycle for all its crane segments while improving the reliability and quality of its product, which in turn has improved the crane’s uptime and reduced maintenance costs.  The improved crane quality has also been reflected in the company doubling its manufacturer’s warranty to two years.  Financially, these lean initiatives have helped Manitowoc lower the amount of revenue it needs in order to breakeven from $1.6 billion to an estimate of $1.2 billion over the past five years.

Aftermarket

There are about 145,000 Manitowoc cranes operating in the field and all of them require a certain amount of yearly maintenance to keep in good working condition and prevent downtime in the field.  Aftermarket revenue comes from replacement parts, in field maintenance, repair & service, remote fleet management, and technical support & training.  Crane owners who actively support and maintain their fleet report higher utilization rates and higher resale values.  In the past, because Manitowoc’s replacement parts fulfillment and inventories were so poorly managed, the company was forced to allow customers to use non-Manitowoc parts to make repairs even though it “officially” violated the company’s warranty.  In the last couple of years, Manitowoc replacement parts segment has benefitted both from facility consolidation and newly designed cranes using interchangeable parts (70% used on multiple platforms).  This has not only improved Manitowoc’s same-day fill rate to over 90% and its inventory turns but has also helped reduce inventory SKUs and obsolescence.  Today, Manitowoc is once again enforcing their established warranties.

Aftermarket sales are recurring, come with higher margins, and help to offset the cyclicality of crane sales.  Since leaning out its operations and focusing more attention on its aftermarket segment, Manitowoc’s aftermarket sales have increased to 18% of total revenue with the goal to have it represent 25% of total revenue in the near future.

Valuation

In the short run, it is particularly challenging to value Manitowoc.  The company’s revenues have been negatively impacted as the global shutdown affected all of its end markets.  Even though MTW’s manufacturing operations have recently restarted, it is operating at lower utilization levels than at the beginning of the year.  All the information surrounding the company’s 2020 reduced outlook and utilization is being reflected in the company’s depressed stock price.  But for the long-term patient investor, Manitowoc presents a nice risk/reward opportunity. Recent comments from industrial/equipment companies (CAT, ITW, CMI & URI) indicates that their end markets are stabilizing and beginning to show signs of small monthly improvements since April.  Not only has Manitowoc’s ongoing lean process made the company more profitable at lower revenues levels but it promises to make the company even more profitable than in the past when revenues recover.

By mid-2021 I believe that Manitowoc could be hitting a revenue run rate of $1.7 billion, especially if there are infrastructure programs in place.  With an EBITDA margin of 6.5% (a level the company hit without all its lean process in place) and net debt of $245 million, the company would be worth around $14/share.  As revenues continue to improve, as customers need to refresh their fleet, so will the company’s EBITDA margin.  As economy recovers and MTW returns to the $1.85 billion in revenue achieved in both 2018 and 2019, the company would be worth over $24/share.  Conversely, if by mid-2021 Manitowoc’s revenue run rate is closer to $1.55 billion, then the company would be worth around $10/share.

In the past, Manitowoc believed that it could achieve a 10% EBITDA margins based on $2 billion in revenues.  I believe that going forward, Manitowoc will be able to hit its 10% goal at lower revenue levels, reflecting both its growing aftermarket segment and the benefits of its lean operation.  

Summary

As mentioned in the “overview,” this is not a quick recovery investment idea.  Manitowoc’s fiscal Q2 & Q3 earnings are expected to be disappointing and will most likely lack any clear industry guidance.  An investment in MTW is both an investment in its management’s ongoing ability to make the company more profitable at lower revenue levels and a way to invest in the anticipated global infrastructure projects.  In its most recent earnings call in early May, Barry Pennypacker explained how the company continues to take steps to reduce the impact from the CoronaVirus by lower capital expenditures along with working capital, suspend share repurchases, and lower SG&A spending.  They hope to save around $8-10 million.  Without the catalyst of future guidance or new infrastructure projects, the stock may continue to drift in its current range giving a patient investor time to build a position.

Manitowoc’s customers have historically refreshed their cranes every 7-9 years.  This cycle has been disrupted since 2009 as many end markets have come under pressure.  Customers can delay their purchases but will still need to refresh their cranes at some point or risk not having newer cranes to offset their maturing fleet.  In addition, the longer an equipment service company keeps its cranes, the higher their maintenance costs.  In the meantime, equipment service companies still need to do ongoing maintenance to keep their cranes in good working condition and that helps Manitowoc’s aftermarket sales.